How To Catch A Falling Knife

When a stock’s price has experienced a downturn, buying it in the hope that it picks up again is tempting. It’s a strategy that can pay off, but knowing when to enter requires precision. Otherwise your portfolio could suffer.

- Simon Brown

The market is full of colourful phrases. One example is ‘dead cat bounce’ – when a stock price collapses and then briefly bounces before collapsing again. Another is ‘trying to catch falling knives’. This is when we frantically buy the same collapsing stock in the hope that we are buying at the bottom. Usually, however, we get it wrong and lose our fingers in the process.

I’ve been reminded of these phrases recently as my inbox fills with questions about some of our fallen angels, with readers specifically asking whether it is time to buy them. I’ve also been reminded of a comment from a friend who now runs IG Australia. This friend of mine is always full of insightful ideas that aren’t (but should be) market phrases. One of my favourites is that a ten-bagger first needs to be a one-bagger before it goes on to become a ten-bagger. We should therefore be patient.